Money market

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Differentiation between money, capital and credit markets

The money market is that sub-market of the financial market on which short-term money supply and short-term money demand meet with the money market interest rate formed from this .


The money supply is offset by the money demand on the money market. Trade properties are central bank balance , day and time deposits , repo and lending transactions , short term securities ( money market instruments ), facilities of Central Bank (z. B. main refinancing of the ECB ), money market derivatives ( forward rate agreements , overnight index swaps , money market futures ), Treasury Bills or Change . Central banks ( money supply ), credit institutions ( money supply / money demand ) and other financial intermediaries , large companies from the non-bank sector or the state and its subdivisions ( public administration , state-owned companies , municipal companies ) ( money demand ) act as market participants . Also transactions of the interbank market and the international credit transactions take place partly on the money market. As money buyers, investors belong to the market participants of an extended money market concept. The price on the money market is generally called the money market rate. Transactions are carried out over the counter , e.g. B. on the phone, completed by so-called money dealers. The traded minimum denomination is usually 1 million euros.

The capital market differs from the money market primarily in the maturity of the objects of sale. This classification was introduced in 1909 by the economist Arthur Spiethoff . On the money market, it relates to terms or maturities of less than two years, whereby the differentiation is made differently. The medium term (2–4 years) is assigned to either the money market or the capital market in specialist literature .

Money supply

In the banking system , money is a liability on the balance sheet because it is on the liabilities side of the balance sheet in the form of cash at the central bank and as sight deposits at commercial banks . In terms of the balance sheet, the supply of money is therefore the willingness of the banking system to accept liabilities that represent money.

In modern economies, money is offered, ie “produced”, by the central bank and commercial banks. Accordingly, a distinction is made between central bank money and commercial bank money in the money supply. The central bank money consists of cash and reserves that commercial bank money is created as part of the active money creation . The central bank controls the supply of money directly (central bank money) or indirectly (in the case of commercial bank money) through interest rates, open market operations and the minimum reserves .

Demand for money

Money demand is the amount of money that economic agents demand in the money market . The (latent) need for money only becomes a demand for money when the economic entities appear as market participants on the money market and ask for money (cash, book money) there.

Demand for money arises from the need to bridge the time gaps between income and expenditure . There is therefore a demand for money when payments are due for the purchase of goods and services (for consumption or investments ), for investments or for the repayment of debts ( transaction fund ). If there is uncertainty about the amount of the transaction requirement, there is a demand for money to protect against illiquidity ( precautionary fund ). Money for hoarding purposes because of price and interest rate expectations (speculative fund) also creates demand for money. If the nominal gross domestic product plus trade in used goods (transaction volume) increases in the national economy at a constant velocity of circulation of money, the demand for money increases proportionally. It falls when the interest rate rises .

Interest rate control by the central bank

Bundesbank short-term money market rates since 1980

The control of money market rates is one of the most important monetary policy activities of central banks . The European Central Bank (ECB) controls money market rates via the main refinancing rate , the marginal lending rate and the deposit rate , which means that the money market rate usually always moves between the last two rates mentioned, which together form the interest rate corridor .

In addition to the quantitative method of discount policy , the US Federal Reserve (FED) controls money market rates using a target range for the federal funds rate . The Swiss National Bank is pursuing a similar strategy. Their quantitative control takes place via the above. Buyback agreements, direct control of the interest rate using a target range for the three-month Libor .

Within the interest rate corridor, the money market interest rate is based on the relationship between the supply of central bank money and the demand for central bank money, whereby the money market interest rate to be paid is based on the shortest possible notice period at which the money market loan must be repaid.

Market equilibrium

Macroeconomics examines, among other things, the market equilibrium . The findings about this can also be transferred to the money market, where we are specifically talking about the money market equilibrium. The money market equilibrium arises on the money market when the demand for money coincides with the supply of money :


This so-called LM function leads neither to inflation nor to deflation in the goods market . If money demand and money supply do not match, there is either a money gap

or vice versa, there is a surplus of money . Money gap or money overhang produce inflationary or deflationary effects and are therefore eliminated by the central banks as part of monetary policy by controlling the money supply.

Functions of money markets

Money markets work like any other market . A distinction must be made between the allocation, information, evaluation and coordination functions:

  • The allocation function concerns the distribution of money supply and demand. The money allocation is considered efficient if those money seekers receive the offered financing instruments who can achieve the highest benefit with the money . The efficiency benchmark is the money market interest rate.
  • The information function is of crucial importance for the functioning of the money markets because market participants have to make their decisions on the basis of available information. Money providers must have access to information about their credit risk, for example through the financial statements of the money seeker .
  • The evaluation and price-setting function of the mostly over-the-counter-traded financial contracts unfolds primarily through ratings of the rating agencies of the money providers and the risk classes of the financial contracts.
  • The coordination function ensures that the decentralized and mostly non-harmonizing economic plans of the money market participants are brought into harmony as far as possible.

A risk transformation takes place on money markets when financial intermediaries between market participants come with different risk and the default risk change.

How the money market works

The money market is of central importance for balancing liquidity between commercial banks and for refinancing them . The most important element is the business relationship between commercial banks and the central bank. Basically, commercial banks have different methods of meeting their short-term liquidity needs. In addition to raising central bank money via main refinancing transactions (in the euro zone via the so-called main refinancing instrument , in Switzerland via repurchase agreements with the Swiss National Bank ), various central banks offer other short-term refinancing instruments; in the euro zone this is the marginal lending facility ; in the United States it is discount deals with the Federal Reserve Banks .

In addition to these transactions with the respective central bank, commercial banks can also optimize their central bank money requirements via the money market. If a commercial bank has a need for central bank money that exceeds the facility granted by the central bank , it tries to meet this need on the money market by lending excess central bank money to other commercial banks in interbank trading .

Market Participant Risks

All market participants are exposed to a default risk, which consists in the fact that the business partner (counterparty) can no longer fulfill his contractual obligation ( Herstatt risk ). This settlement risk is monitored through the granting of mutual credit lines . The market participants are therefore only willing to make money available to someone else up to a specified maximum amount. It must be taken into account that the transactions in interbank trading are usually carried out without credit protection ( blank credit ). In addition, there is an interest rate risk from money market activities , but this is comparatively low due to the short deadlines. The money market is an important instrument for controlling the liquidity risk , whereby money market activities can also give rise to independent liquidity risks.

Individual evidence

  1. ^ Arthur Spiethoff, The external order of the money and capital market , in: Gustav von Schmoller (Ed.), Yearbook for Legislation, Administration and Economics in the German Empire, Issue 2, 1909, pp. 17 ff.
  2. Joachim von Spindler , Geldmarkt - Kapitalmarkt - Internationale Kreditmärkte , 1960, p. 34
  3. ^ Karl Friedrich Hagenmüller , Capital Market , in: Handwortbuch der Betriebswirtschaft, Volume II, 1962, Sp. 3008
  4. Dieter Duwendag / Karl-Heinz Ketterer / Wim Kösters / Rüdiger Pohl / Diethard B. Simmert, Monetary Theory and Monetary Policy in Europe , 1999, p. 111
  5. Gabler Wirtschaftslexikon, Volume 3, 1984, Sp. 1697
  6. Dieter Duwendag / Karl-Heinz Ketterer / Wim Kösters / Rüdiger Pohl / Diethard B. Simmert, Monetary Theory and Monetary Policy in Europe , 1999, p. 110
  7. Fritz Söllner, The History of Economic Thinking , 1999, p. 174
  8. Bernhard Felderer / Stefan Homburg, Macroeconomics and New Macroeconomics , 1994, p. 80
  9. Ulrich CH Blum / Alexander Karmann / Marco Lehmann-Waffenschmidt / Marcel Thum / Klaus Wilder / Bernhard W. Wieland / Hans Wiesmeth, Basics of Economics , 2003, p. 130 f.
  10. Ulrich Pape, Fundamentals of Financing and Investment , 2015, p. 11
  11. Ulrich Pape, Fundamentals of Financing and Investment , 2015, p. 12
  12. Ulrich Pape, Fundamentals of Financing and Investment , 2015, p. 11 f.
  13. Karl Häuser, Kapitalmarkt , in: Wolfgang Gehrke (Ed.), Handwortbuch des Bank- und Finanzwesens, 1995, Sp. 1124